Pricing lesson from onion rings

Over the weekends, I visited Fat Papas burger restaurant with my family. We ordered Wimpy Burger ($15) and Fried Steak ($19). The portions are hearty and they tasted great. I’d go back for more someday!

After the main course, as an afterthought, we decided to order their Onion Rings ($8). It tasted good. We enjoyed it.

As I was eating, I thought, “how much does these onion and batter cost? It cannot be half the cost of Wimpy Burger right?” Yet I paid $8 VS $15, and I did not complain. The chef was able to transform some inexpensive batter and onion rings into a dish which looked yummy and appealed so much to my palette, that I was willing to pay for it.

Something clicked in my mind. I started to see that the same principle can be applied to pricing any products in business.

It doesn’t matter how much is the ingredient I put into the product or service. What matters is how I package it into something that MEET PEOPLE’S WANTS AT THE RIGHT PLACE, AT THE RIGHT TIME.

I can have the best ingredient, but if I don’t know how to cook them right, I end up with something horrible. No one is going to pay a lot for my horrible dish simply because I paid a lot for the ingredient.

Conversely, I can have the simplest ingredient, but because I have the culinary skills to cook them right, I can transform them into tasty dishes which people are willing to pay for, without asking how much are the ingredients.

My takeaway is: don’t do what is called “cost-plus” pricing strategy. “Cost-plus” pricing means figuring out the cost of a product and from there, mark up a profit margin to come up with the selling price. With “cost-plus” pricing, coffeeshops come up with price of a cup of coffee based on all the costs involved, plus a maybe 20% profit margin. “Cost-plus” pricing allows us to get a cup of coffee at $1.20.

That is not how Starbucks and Coffee Bean & Tea Leaf figure out their price. It is not how Apple figure out the price of the next iPhone. They are able to charge way above their costs because they MEET PEOPLE’S WANTS AT THE RIGHT PLACE, AT THE RIGHT TIME.

As tutors, “cost-plus” pricing strategy means that we decide our fees based on our total costs (manpower, rental, curriculum, marketing and distribution) plus a 20% margin.

How do we step away from “cost-plus” pricing and price like Starbucks?

Hopefully this revelation at Fat Papas burger will help to open my mind and change my paradigm.

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